Commentary by Michael Spilky, President of Location Matters
More closing restaurants to come, more inventory of commercial properties for sale... the market peaked here in San Diego 6 months ago...why and what's next?
The average consumer would be surprised to know that most of their favorite dining spots are likely breaking even, losing $, or turning very small profits, with the exception of some very high volume operations, "the next it place" or tenants holding down grandfathered leases with exorbitantly low occupancy costs. Others that are successful understand the value of entering undeserved trade areas and the power of limited competition. Restaurants are now more than ever increasingly forced to modify their overall business model to stay alive.
The Restaurant Business as we know it is under attack. Why?
Too Many Restaurants - There is a glut of dining options and we are hitting a saturation point. The market does not have enough consumers to support all the new places that have opened, and those to come.
Delivery - Uber eats, Post-mates, Door Dash etc has become the norm, consumers love their convenience but this takes customers out of seats. Restaurants also take extremely low margins or even losses on these sales. The development of "Ghost Restaurants" these are restaurants with cheap commercial kitchen space that only deliver.
Grocery Stores - Who would have thought, but more and more grocers are morphing into restaurants, think Whole Foods and their to go, dine in food options. The new buzzword is "Grocerant" All Grocers see this trend and they are adding prepared foods.
Home Chef Meal Delivery - Plated, Hello-fresh, Sun Basket, Blue Apron... etc. these companies deliver complete cook at home meals and yes they are impacting dining out.
Breweries & Brew Pubs - We love these in San Diego, but they are also killing restaurants. Large breweries that set up in inexpensive industrial spaces or rural sites are serving large crowds and selling lots of food. Stone & Ballast Point have lot's of square feet... but San Diego's some 150 breweries, have tasting rooms that also sell food.
Increased Rent - Occupancy costs in some trade areas have gone through the roof, and these rents are just not sustainable.
Food & Labor Costs - Food Costs for proteins and center of the plate items have steadily increased, eating away at already thin restaurant gross margins. Minimum wage has and will continue to effect a restaurants ability to be profitable, the recent increase in Minimum wage is starting to take it's toll.
Lower frequency - Restaurants are trying to hold onto profits by increasing pricing, but they are seeing customer traffic decline as a result.
How Is This Affecting Retail Real Estate?
Increased vacancy is inevitable, and will start in peripheral locations first.
Great real estate will always be great real estate, and as one restaurant closes there will be eager tenants to fill that great space. Secondary locations, or saturated markets are already seeing some vacancy increases.
Turn-key spaces with built out kitchens, ready to go ABC Licenses will lease up easier and older worn out spaces will be challenging to fill.
New construction will need more TI $ allocated to attract better tenants.
Landlords must choose their tenants wisely now more than ever, only choose those that can push volume, still have a good value proposition & have a low cost business model will survive the headwinds.
By no means is the sky falling out right now, we just see increased turnover ahead for landlords, and the real possibility of compression on rents in specific trade areas. Restaurant operators will need to start significantly tweaking their business models to lower costs to operate profitably in today's climate.
Location Matters is a San Diego based commercial real estate brokerage focused on retail properties, with a very specialized restaurant leasing and sales team. For more information about Location Matters, visit www.locationmatters.com.
